Analysis: Bush's Reaganite tax cuts

President Ronald Reagan spent on fighting the "evil empire." President George W. Bush spends to fight the "axis of evil."

Reagan cut taxes. Now Bush is emulating him.

Reagan ran up a huge fiscal deficit. Bush is doing the same.

Reagan is remembered not for the deficit but for reinvigorating the economy and America's confidence. Bush hopes the same will prove true for him.

When he campaigned for president in 2000 Bush conjured up Reagan-like optimism on America, and the tax cuts he then proposed and is now implementing were based on faith in individual Americans rather than in government.

"It's the people's money," Bush said time and time again, "give it back to them." In their hands, it would achieve more. Individuals would make America great, not government.

This, then, is Bush's Reaganite ideology, faith in individuals and in the invigorating force of individuals working, earning and spending. That faith has been central to America and to its success. Its appeal to Americans tends to be strong.

To the current economic problems of the United States, Bush therefore brings the force of his popular elemental ideology. Give jobs to Americans and give them the job of re-invigorating the economy. They will succeed. But is that right?

Reagan inherited a slack economy and attacked its weakness by cutting taxes and slashing red tape. He did help to get Americans back to work. But his fiscal deficit, which climbed to a peak of 6 percent of gross domestic product, left work for his successors. Some of the growth he achieved was given back in subsequent recession. More important, then, were the seeds he sowed, of a new more business-oriented culture, which in the 1980s and 1990s helped the U.S. economy to grow.

Bush's inheritance was quite different, an economy faltering at the end of an unprecedented decade-long spell of uninterrupted growth. When Bush came into office, getting Americans back to work was an unnecessary cry: they had more jobs than ever before. Unemployment was at its lowest level for three decades. Rewards were high. Salaries and bonuses were bid up. Stock options were a get rich quick scheme, which worked for many people, and have now left many others, pensioners in bankrupt companies such as Enron, impoverished.

Is Reaganite deregulation what America now needs? Bush the Reaganite has been forced to become an advocate of a clean up of corporate America, for higher standards in accounting and corporate boardrooms, for investigation and prosecution of financial crime. These are not Reaganite themes, but times have changed and Bush has had to adapt to them. Some of America's most wealthy and powerful individuals did not behave. That is part of the reason why the U.S. economy is in a mess now. Government has to do something about corporate abuses.

Bush effected the biggest tax cut in U.S. history in 2001, and is now looking for more.

Tax cuts help to feed demand for goods and services. People keep more of their money and therefore have more to spend. Cutting taxes therefore works best in an economy where unemployment is high and the consumer cautious. Put more money in people's pockets by cutting taxes and their spending will increase, creating jobs for other people. A virtuous cycle may begin.

But American consumers have not been failing to spend in recent years, not even in the past three years, in which overall economic growth has been weak. In the late 1990s Americans enjoyed a consumer boom. In October 2001, encouraged, it is true, by cheap financing, automobile sales in the United States were higher than ever before. In the past two difficult years consumer spending has not even contracted for a single quarter.

There are other signs that Americans are spending freely. The United States recorded in March a trade deficit of $43.5 billion, the second highest ever. The highest was recorded in December 2002. The deficit on current account, the broadest measure of trade, was, at over half a trillion dollars in 2002, the highest ever. Americans are importing much more than they export because consumption is high in the United States, not weak. They are buying more homes than ever before and paying more than ever for them, because low interest rates make money cheap and abundant for those who can borrow.

All this raises questions. Is now the time to be cutting taxes and encouraging Americans to spend to keep the economy going? Should they not be saving more, even if it means, yes, that growth will weaken and unemployment will rise further? Is a slowdown not inevitable after the falsely based boom? And is it not, in fact, the quickest route to a balanced and healthy economy?

It is not high taxes that have made the U.S. economy weak. The problem is high spending, the spending that went on in the late 1990s and that was funded by a stock market bubble and stock options and exaggerated bonuses and excess.

The stock market funny money has gone. Ultra-cheap money from Federal Reserve Chairman Alan Greenspan and tax cuts from Bush are replacing it. Even now that the stock bubble has burst, the bubble economy must be kept inflated, and even if new signs of excess are appearing, in house price inflation and the soaring fiscal deficit.

Bush is seeking to follow in Reagan's footsteps. Cut taxes and there will be more growth and more jobs, he argues, and over time the growth and the jobs will cut the government's budget deficit.

But Reagan's ideas, like those of Prime Minister Margaret Thatcher in Britain, were right for their time. The sickness that ails Bush's economy is utterly different. His tax cuts will create a soaring deficit, another excess, and rising debt, which will weigh on Americans in years to come. What the U.S. economy needs is balance, even at the price of recession. This is the only way to recover from the excesses of the 1990s.

It is not enough to be an imitator. A president must do the right thing for his time.